Pethokoukis

Gold bugs shouldn’t read this

MKM’s Mike Darda makes a number of great points here:

1. With gold tumbling more than 25% from its 2011 high (into official bear market territory), the strategy of buying gold (instead of equities) since the initiation of QE has failed.

2. As we have pointed out in the past, if gold had simply followed the CPI over the last 100 years, the gold price would be just below $500/o z., meaning even after this pullback, the yellow metal could still be seriously extended.

3. In any event, gold and industrial commodity prices have de-linked from U.S. NGDP, inflation and inflation expectations over the last 12 years, meaning the most recent fall (and the previous run-up) likely do not have material implications for the U.S. business cycle.

4. Historically, industrial commodity prices have tended to fall at about a 1.7% per annum pace in real terms. Thus, the neo-Malthusian argument for a commodity price super cycle based on a population explosion and ever-increasing scarcity never made much sense to us. In the more intermediate term, however, the China leading indicators we track suggest slight downward bias for industrial commodity prices, an outlook we would continue to characterize as neutral.

 

3 thoughts on “Gold bugs shouldn’t read this

  1. Darda has no clue about what he is talking about. What we have seen with gold is an orchastrated dump in the futures markets that have set off margin calls and triggered automatic selling by the technicals. When you dump 400-500 tons in one day, mostly during the low volume periods that will happen. The trouble is that the physical market is not going down in the same way. As the paper shorting goes on and prices fall buyers of real bullion step up and pick up supplies. There are probably 3,000 tons that can be used to drive down the price of gold, all of it from failing countries looking to stave off a default. But all of that will be bought by countries that hold surplus dollars and treasuries and are looking for a way to increase their gold reserves. When the extreme oversold conditions run their course the shorts will have to come up with real bullion to sell. But if you look at the COMEX and other exchange warehouses they don’t have the metal to do so.

    My advice Jimmy is to ignore the failed Keynesians and Monetarists and to get a hold of some physical bullion while it is being subsidized.

    • Paper gold sold in the futures market is not real gold Larry. The central banks will continue to keep printing and try to devalue the currencies. (See Japan for a great example of the new strategy.) In the short run it is possible to get the price of gold to go down by another 20-30% or so if even more bullion is dumped by troubled countries and there is your usual naked shorting going on. But the big problem is the actual supply that would have to be brought to the market if the paper longs take delivery. I think that there will be a default on the COMEX or LME some time in the next year. When that happens the paper gold longs will get whatever price the exchanges pick and there will no longer be a futures market is silver and gold. If you have the stones for it look for an entry position into the gold markets and ride the second leg of this secular bull market to the top. While much more violent, this decline is not all that different than the one in the 1970s. If you know what happened after that decline was over you will figure out what to do next.

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